From Negative Gearing To Happiness
Blindly following a negative gearing investment strategy for years, Ian Ugarte realised how crippling it was for his family’s fortunes. He's since turned things around with a commitment to self-education. Back then, Ian and his wife Christine Manning threw in their full-time jobs, to provide community-focused housing solutions and help others create wealth using their proven strategies.
""We realised that a four bedroom house that was being rented for $420 could now get up to $800-1000 and double our rent coming in on the properties.""
API: When did you first start investing and what do you love about property?
IU: We’ve been investing for 25 years now. I essentially bought my first investment property when I was 18. I had the typical ethnic background where my parents put a deposit on a house and I paid the loan off. I then sold the house three years later for a profit and paid my parents back. That gave me the deposit to go into my own property. What I love about property now - as opposed to before (I used to be a negative gearer) - is the positive cashflow that comes from the strategy that we choose to use and the capital appreciation that comes as a result. We’re sitting there being paid while our capital is increasing and there are not many other asset classes that actually do that and aren’t volatile.
API: Was there anything that initially held you back from investing?
IU: Negative gearing! My wife and I built ourselves up to a portfolio of seven properties and whilst that was giving us a wealth position in the long-term, in the short-term, it was drying us out of cash on a daily basis. We got to a stage where I didn’t feel the pain of negative gearing because I always thought it was the smart thing to get my tax back. When I didn’t have enough money I went and bought another property to get more tax back, but it ultimately took more cash away from our family.
API: When did the limitations of your negative gearing investment strategy hit home?
IU: I went away on my yearly holiday from work and on my return, new employment circumstances changed everything. I wanted to leave but I couldn’t because we were $36k negatively cash flowed. Basically, $692 was coming out of our pocket every Monday morning before I could feed Christine and the kids, which really started to hurt. What was holding us back was the ability to have the freedom and choice to do what we wanted to do on a daily basis because our income was being starved by the negative gearing.
API: How did setting concrete goals help you overcome your obstacles?
IU: Firstly I went out and got some education because I was just buying property like everybody else did as I thought it was going to make me rich - which ultimately it would have if I’d been able to hold the negative cashflow. I’d seen other people that had got out of paid employment within 18 months, hence we set our goal for that too. The strategies we implemented were newish and within the space of 13 months, we were out of paid employment. Without setting that goal, we would probably still be stuck in work.
API: What mentors and resources did you seek to aid your property journey?
IU: I did a number of different education programs in wealth creation and invested well over $200k in the first two years. Technically we couldn’t afford that amount of money, however every project we did gave us a little bit more to go and do another education program, which then built us to the next level. We first went out and paid $5k for a program that got us some basic understanding around positive gearing, opened us up to different asset protection and structuring, understanding what the banks want, the different types of strategies we could implement. Out of that $36k negatively cash flowed portfolio, we actually had to sell down six of the seven properties after realising that they were duds.
API: Is there a valuable lesson that you learnt through your journey?
IU: The biggest lesson would be that ignorance isn't is bliss. If you don’t have the education and you don’t know what you’re doing, the chances of your success are very, very low. I’ve seen that time and time again, not only with ourselves but other people we’ve worked with along the way.
API: What has experience taught you while building your portfolio?
IU: After having got to a place where we no longer needed to be in paid employment, continuing as full-time property investors, I woke up one morning in 2013 and it was the saddest day of my life. I thought that money was going to make me happy. I’d chased it for 39 years and all of a sudden I had it, yet I’d woken up in a place where I was contemplating no longer being on this earth. From that my biggest lesson was that money doesn’t make you happy.
wakening from the darkest moment in his life, Ian realised the power of money lay in the freedom and choice it offered, rather than being a provider a happiness. Together with Christine, he moved away from a development strategy that churned out properties, to looking at dwellings that provided real solutions. Small is the New Big now creates genuine community connections by providing housing diversification around the country so that people have choice regarding what they live in and where.
API: What was your aha moment that led to your interest in positive cashflow properties?
IU: Anything we did had to make sense before it made dollars, it had to affect community in a positive way first and second, it needed to make money. We started to realise that the housing that was being built by most developers was upside-down and stupid - and that included what I used to put to the market. We looked at what the demographic really wanted and found 60-80% of the marketplace seeking accommodation were singles and couples, while 80% of the built marketplace were 3-5 bedroom houses.
API: How did you turn this realisation into a positive opportunity?
IU: When hotel rooms were too expensive AirBNB came along, when taxi drivers weren’t that great Uber came along and fixed the marketplace. Right now, we’re fixing a marketplace because when 60-80% of the people only need smaller accommodation (and we’re not talking about units, we’re talking about homes that are either studios or one-bedders) and the market is offering them big houses, then we’ve got something we can fix, and do very well out of at the same time.
API: What can you tell us about the development of the high-income real estate system strategy?
IU: We researched and found that in a Metropolitan area, the median rent for a four-bedroom house is $420 per week, while a two-bedroom house rents for $415. When you look at the disparity, you’ve got $5 extra for two bedrooms. We started to look for strategies across the country that incorporated existing policies where I could take those four-bedroom houses and retrofit them into smaller micro-apartments with one communal area. We used communal residence, rooming house or boarding house policies to achieve this goal. They’ll usually have their own bathroom and bedroom / lounge room and can also have their own food preparation / kitchen area, so if they don’t want to use the communal area they don’t have to - they’re fully self-contained. We realised that a four- bedroom house that was being rented for $420 could now get up to $800-1000 and double our rent coming in on the properties. The people that are staying in those properties are also saving themselves $150-200 per week, which means they can save and get into their own properties in the next three to five years as well.
API: How did you put your experience in property development towards helping those in need?
IU: Looking at the numbers, we’re 1million self-contained homes short in the next 10 years in Australia. The answer to fixing the problems of housing stress is by producing these types of homes. I’m not in the position to do that myself, so the high-income real estate system was brought about by us realising we could teach other people to do exactly the same thing. Our purpose is to show people that you can implement our strategies on the next deal or the deals you've already secured - investors just don’t know the strategies are out there. The big part of this is compliance as well. There are huge rules and regulations and if you do the wrong thing, you could be fined $200k or face two years’ jail time.
API: What type of investor does the high-income real estate system strategy suit and what are the main benefits?
IU: Anyone that can save themselves $10k can get themselves into these strategies. We’ve got the sophisticated investor that can go top end with a large number of rooms and a huge amount of cashflow - we talk about double-digit returns where we gross 10% and in some cases up to 16% from these initiatives. We have developers that are multi-millionaires joining our programs because they see that there’s a change that’s required. We then have the standard everyday investor that’s buying a property or two and wants to do well out of them rather than negative gearing. Then we have the rentpreneur strategy which is where you seek permission from the agent and the owner of the properties to be able to with full disclosure do minor alterations to retrofit so that you can earn income from that property. One such example of our own is a property in Brisbane where we spent $10k on fire, safety and furnishings, we pay $420 per week and collect $850 per week giving us an after cost cash-flow of over $14,000.